A looming fiscal cliff on Social Security disability

Unless Congress acts, beneficiaries face an automatic 19 percent cut in benefits as early as 2016.

In their latest annual report, released July 2014, Social Security’s Board of Trustees projected that the combined Social Security trust funds will go broke in 2033. This seemingly far-off date may lull policymakers into a false sense of security that Social Security reform is something they can avoid for now.

But the reality is that a potential crisis is coming sooner than some might think – the Social Security Disability Insurance (SSDI) trust fund will be insolvent as early as 2016.

“The best way to avoid brinksmanship and ill-conceived, last-minute cuts is to begin conversations around solvency reform for all of Social Security – today.”

SSDI is funded through the same payroll tax that funds Social Security retirement benefits—and like its old-age cousin, it’s running out of cash, paying more in benefits than it’s taking in. Unless Congress acts, current law will require an immediate benefit cut—projected to be 19%—for all disabled workers, their spouses, and their children at some point in 2016.

Recipients of disability insurance are among the most vulnerable groups in the United States. They generally have a long-term medical condition that impairs their ability to work. On average, disabled workers receive $1,145 per month—not a king’s ransom. Eligible spouses and children receive about $300 more. For eight out of ten beneficiaries, SSDI is their main source of income.

To rescue SSDI in the short term, Congress could end up doing what it did in 1994—the last time the SSDI fund ran dry—which is to reallocate a portion of future tax revenue from the fund for retirees (Old Age and Survivors Insurance, or OASI) to SSDI. Automatic disability cuts would be postponed, but the OASI fund would be made more precarious that it already is.

Moreover, some conservatives may not go for a no-strings-attached reallocation. Pointing to examples of fraud and the program’s rising costs, they could demand reforms to the disability program in exchange for extending its solvency.

Since 1995, the disability rolls have doubled and program costs have jumped from 1.4 percent to 2.4 percent of the economy’s taxable payroll. One percentage point may not seem like a lot, but it is the equivalent of $62 billion in 2014.

The most significant reason for this rise in disability claims is demographics. Older workers are more likely to suffer disabilities, and as boomers reach pre-retirement, some enroll in SSDI before shifting to retiree benefits. In addition, the entry of more women into the labor force has grown the pool of eligible workers.

Another huge factor is the economy: many disabled people who previously found work but have become unemployed since the recession are now claiming the benefit to which they have been entitled all along.

Source: The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds

NOTE: Prevalence rates show the share of persons receiving benefits per 1,000 insured. The gross disability rate has risen from 36 per 1,000 in 2000 to 60 per 1,000 in 2014. But much of that rise is accounted for by the aging of the population and an increase in the number of insured women. The age-sex adjusted prevalence rate shows that if the demographics had remained constant since 2000, the gross prevalence rate would have risen at a substantially slower pace.

The best way to avoid brinksmanship and ill-conceived, last-minute cuts is to begin conversations around solvency reform for all of Social Security – today. The best way to do this is through a commission, like the one proposed by Reps. John Delaney (D-MD) and Tom Cole (R-OK).

A commission would have several benefits. First, a holistic fix to Social Security is the most politically viable path to new revenue. Whereas reallocation would simply shift resources over from the retiree program, a holistic approach would result in fixes to both programs. A commission is likely to raise the payroll tax cap, gradually infusing both sides of Social Security with larger contributions from high-income workers. We know a tax cap increase is likely, because it is featured in the two most prominent bipartisan solvency proposals of the last five years.

Second, a commission is most likely to seek innovative reforms to SSDI as opposed to benefit cuts, which must be avoided. For example, the program could more effectively incentivize employers to accommodate and rehabilitate workers with early-stage disabilities. Also, those already receiving disability benefits could be allowed a more gradual reduction in benefits if they return to work, making the decision to do so less risky. For those with disabilities, innovative reforms could deliver work opportunities that pay and provide a sense of meaning and community in their lives.

If Congress needs a small bipartisan victory on Social Security before launching a major commission, a good place to start is disability fraud. Reps. Xavier Becerra (D-CA) and Sam Johnson (R-TX) have introduced thoughtful and similar fraud bills. This effort wouldn’t rescue the program’s finances alone, but it would preserve resources for those who have earned them—and lay the political groundwork for broader reform.

Congress is great at short-term fixes (witness the series of stop-gap measures to keep the government funded and to avoid a breach of the debt ceiling), but in this case, the short-term fix will cause much more pain and sooner than people think.

Fortunately, there’s still time to avoid the cliff, and the beginning of a strong bipartisan solution is already on the table. Let’s give it a try.

David Brown is a senior policy advisor for the Economic Program at Third Way.